In difficult conditions of the modern market, when any mistake of a managerial or other nature can lead to the liquidation of the enterprise, various indicators are extremely important, in the analysis of which it is possible to determine the prospects of a particular business entity. This is extremely important for potential investors who need some kind of confirmation that their money will not go "nowhere." In this regard, indicators of liquidity as well as solvency are very important.
These are the main characteristics of any market enterprise. It should be remembered that solvency is the company's ability to make possible settlements with creditors, and liquidity is the financial and material reserves available at a particular point in time. However, in practice, both of these concepts most often act as synonymous. So, in this article we will consider the main indicators of liquidity, which operates in modern economic science. They are extremely important in the current market economy with its extremely unstable and unsteady indicators, as it allows you to fairly reliably assess the real opportunities available to the enterprise.
About solvency
The difference between current assets and some current liabilities organization called working capital. This is a very important concept that can be used both to determine solvency and to clarify liquidity. This happens for one simple reason: while the company's liabilities are less than assets, it has working capital. In some cases, this indicator is called net cash assets.
If the analysis of liquidity indicators shows a change in this value, then it is almost always associated with profit or loss received by the organization. Oddly enough, an increase in the size of current assets while reducing liabilities is most often accompanied by a loss of real cash. On the contrary, with a decrease in this value, the enterprise receives more funds for development.
This is due to the profit in the form of investments and loans that flow into its economy. Of course, in this case, theory and practice seriously diverge, since in reality credit funds do not always benefit the main production capacities of the enterprise and force the latter to constantly adapt to the requirements of the lenders. Again, this is not permissible in all cases.
The peculiarity of own working capital is that it is mandatory and under all conditions should be easily converted into cash. If the composition of current assets includes many such funds, the implementation of which may cause difficulties, then this significantly worsens the real solvency of the enterprise. In this case, the company's liquidity indicators deteriorate so much that we can talk about further bankruptcy of the organization.
Bankruptcy
There are many reasons why an enterprise may be declared completely insolvent. The decisions that are made in this area are extremely important, since on their basis a further strategy is adopted in relation to this organization: its financial support, reorganization or complete liquidation of assets to pay off debt obligations. It is important to understand that creditors who do not receive payments may at any time apply to the court to recover losses and declare the organization bankrupt.
Simply put, this process can take place exclusively in the courts. Bankruptcy itself is divided into two main varieties:
- Simple. It is used in most cases, since it is applied to frivolous debtors who simply could not cope with their obligations due to the inability to conduct business, to issue bills of exchange for doubtful transactions and other similar reasons.
- Fraudulent bankruptcy. In this case, it is assumed that the debtor deliberately misled the creditors by artificially increasing the size of the current assets of the enterprise to increase the possibility of obtaining investments, and from the very beginning was not going to pay the bills.
It is important to remember that economists have long deduced a number of specific criteria that help predict the risk of bankruptcy of an organization in the near future. It should be noted that these factors are extremely important, and therefore they must be constantly remembered by the economists of the company, since neglecting the analysis of key indicators can be extremely costly for the company.
What specific features does bankruptcy of an enterprise have?
Let's give here their main list:
- Poor or non-transparent structure of current assets, financial liquidity indicators are very low or even acquire a negative value.
- If the resources of the enterprise at first glance are sufficient, but they are presented in the form of those funds, the implementation of which the seller will inevitably encounter many difficulties. In many conditions, such a structure may well lead to the complete insolvency of the enterprise.
- Slowing the turnover of fixed assets. As a rule, this is accompanied by the accumulation of large stocks of unclaimed products in warehouses, as well as defaults on short-term loans. Many for some reason do not pay attention to the last circumstance, but in vain: it is the non-payment of small debts that plays the role of the “last call”.
- In the case when the company's liabilities for the most part consist of expensive loans, which will be difficult to repay even with a good profitability of the production process (the current liquidity ratio in this case drops to almost zero).
- If the company has at least one overdue payable, the interest on which has not been paid for a long time.
- In the event that significant amounts of debts are written off to the net losses of the company.
- When there is a pronounced tendency to increase short-term loans in relation to the assets of the enterprise itself.
- A decrease in liquidity ratios is also a very bad sign.
- If the company begins to form its own current assets at the expense of the funds that were received in the form of loans, including short-term ones.
The task of professional economists of the company is precisely to constantly analyze the liquidity indicators of the enterprise and take all measures to completely eliminate all detected negative processes. It should be remembered that the real solvency of the organization is usually evaluated once a month or once a quarter (as a maximum). The difficulty is that many organizations somehow pay their creditors almost daily, which greatly complicates the perception of the situation as a whole.
To solve this problem, you need to record the daily receipt of funds. Similarly, documents are compiled that reflect the repayment of receivables. It is best to create a special calendar, which reflects the timing of settlements with creditors. In this document, on the one hand, you need to display available cash, as well as the expected receipt of funds that can be used to pay off debt.So it’s much easier to see all the obligations to creditors and to find funds on time to repay them. This significantly increases the financial stability and security of the enterprise.
It is very important to include in the composition of the payment calendar all information about the supply and sale of the main products of the enterprise, as well as about the purchased fixed assets. In addition, documents attesting to the settlement process with own employees, including data showing the issuance of loans and interest-free loans to them, are of considerable importance. It should be remembered that prospective solvency is calculated based on the liquidity indicators of the enterprise. To visually show liquidity and solvency indicators, special ratios are used.
Liquidity of an enterprise
In any case, an organization can be considered liquid if it is at least theoretically capable of paying off all its debt using only its own assets. It should be remembered that liquidity is full and partial. This, as we have repeatedly pointed out, depends on the degree of ease of sale of the main types of assets. However, this indicator can be divided into several types at once, each of which is very important for the production process of a modern market company.
Absolute liquidity
The absolute liquidity indicator indicates the ratio of actual cash and simple assets to the existing accounts payable of the enterprise. This ratio clearly shows what specific part of the debt can be immediately repaid at the date of preparation of the balance sheet documents. What is the most optimal value for economists? It is best when the indicators of liquidity ratios are in the range of 0.2-0.3.
Intermediate (adjusted) liquidity
All the same, but the amount of cash and simple assets is compared with the short-term debt of the company. What is the difference from the previous criterion? The fact is that it is calculated not only on the basis of the value of securities, assets and available cash. The expected amount of finance income is also taken into account, including in the form of a specific volume of products shipped and sold. It should be remembered that specifically in this case, the ratio should tend to 1: 1.
What factors determine this indicator?
However, this ratio (its analysis, more precisely) largely depends not even on specific indicators, but on the receivables of the borrower himself, as well as on the financial stability of the enterprise. If there is a large amount of doubtful accounts receivable, then this almost certainly indicates the emerging serious problems in the economic sphere of the company. What other liquidity indicators are there?
Current liquidity
This factor allows you to find out the degree of security of the enterprise with working capital. Accordingly, it is calculated as the ratio of all (!) Current assets to short-term debt. When determining this indicator, it is highly recommended to immediately deduct the value added tax from all tangible assets acquired by the company from the size of current assets. In addition, the estimated costs for future periods are subtracted from the same amount. Short-term liabilities at the same time can be reduced by the size of the estimated income, as well as available reserves, intended for repayment of accounts payable.
These liquidity and solvency indicators make it possible to reliably establish how much the current working assets are greater than the short-term accounts payable of the enterprise. This indicator should ideally have a value of at least two.
Other indicators
An indicator that helps to determine the real security of the company with its own working capital is also very important. It should be remembered that it can be calculated in two ways at once. The first way. The amount of fixed assets is deducted from the source of own funds. The resulting value is divided by the volume of circulating assets. What else can I use to calculate liquidity indicators?
The second way. The amount of short-term accounts payable of the company is deducted from current assets. The resulting value is again divided by the number of current assets. This coefficient must have a value of at least 0.1. In the case when the current liquidity at the end of the reporting period has an indicator of less than two, and the coefficient of supply of fixed assets considered by us is just less than 0.1, then the balance sheet of the enterprise should be considered extremely unsatisfactory. The organization in this case is completely insolvent, and the threat of bankruptcy quickly looms over it.
Only if at least one of these two conditions is in line with the economic norm, can investors discuss a strategy to restore the solvency of an enterprise as soon as possible. In this case, it is imperative that the current liquidity ratio is at least equal to one. And now we will consider the balance sheet liquidity indicators.
Balance sheet liquidity
As we have repeatedly said, the solvency of an organization is greatly affected by the liquidity of its current assets. This term refers to the possibility of transferring them in cash if urgent closure of their obligations is necessary. When determining the degree of their “conversion”, a liquidity analysis is used. In this case, it is necessary to compare among themselves several groups of different assets at once, as well as comparing them with liabilities for liabilities to find out the possibility of their early repayment. Thus, this action allows you to determine how much credit liabilities are covered by available stocks of liquid assets.
In general, all indicators, liquidity estimates (which we examined in the framework of this article) are aimed precisely at the analysis of this issue. If there are sufficient reserves, the enterprise is not so afraid of possible market disturbances and other upheavals in the economic sphere.
So what is balance sheet liquidity? If you carefully read everything written above, then the definition can be deduced independently: this is the speed of circulation of assets in cash, which corresponds to the possible need to pay off all payment obligations of the enterprise. Like all other indicators of asset liquidity, it can also be determined by the speed and direction of change of the company's working capital. Since this value is understood as the balance of the company's own funds after repayment of its short-term liabilities, an increase in this indicator automatically indicates an increase in the liquidity of the organization.
So we examined the main indicators of liquidity, which are operated by professional economists at the enterprise. We hope that we have covered this issue so that you have no questions left.
